Not quite so bright after all … (The July trade data)

The trade deficit (ex-oil) was thought to be on a downward trajectory.    

But after today’s data, that argument may need to be reconsidered.

I have been a bit more cautious than most in predicting the “turn” in the trade deficit. 

That was for two reasons.

First, I wasn’t sure that non-oil goods imports would stay flat at around $127-128b for the entire year.  This month’s data suggests that the economy hasn’t slowed enough to end  all import growth.    Non-oil goods imports rose to $130b.   Barring the recession Nouriel is now forecasting, I would expect non-oil imports to continue to trend up over the course of the year. 

Second, I wasn’t convinced that the very strong growth in US exports that propelled monthly goods exports from $75b a month last summer to around $85b a month now (and pushed goods and services exports up from $106b a month to $120b a month) could continue for ever.   It now seems that the pace of export growth has slowed somewhat. Exports have been stuck at around $120b for the past three months, bouncing up in June and back down in July.

In some sense, conditions were perfect – or almost perfect – for US exports over the past 12 months.  Demand for civil aircraft outside the US was very robust (and demand for aircraft in the US was very low, freeing up all of Boeing’s production for export).    Global growth was very strong.  And in one key part of the world – Europe – that growth was driven by domestic demand.  The lagged impact of the dollar’s 2004 fall was helping US firms gain market share -- particularly in product areas where US production competes with European production.   And even with something of a rebound in 2005, the dollar was clearly much weaker than it had been in 2001-02.    

In sum, conditions were perfect for a surge in US exports.   And that was what happened.    My concern all along has been that things were more likely to get worse than better.   Plus, Boeing’s export capacity looked pretty maxed out – at least until 787s start rolling off a new production line.

Right now it seems to me likely that the 2006 US oil import bill will rise to around $320b, up from $250b in 2005.   That assumes that oil prices will remain in the $65 a barrel range, keeping the monthly US oil import bill in the $27-28b range.   Combine that with 10%  growth in non-oil imports, and the total US goods and services import bill would reach $2235b or so.  10% is the current pace of growth in non-oil goods and services imports.  But keeping up that pace of growth would imply a significant further increase in the monthly non-oil goods bill.  Q4 imports would need to average around $136b in q4 – up from their current $130b level.    

Sustained 13% y/y growth in exports would push goods and services exports up into the $1425-1430b range for the year, implying a trade deficit in the $805b range for 2006.

Personally, I suspect that both the pace of non-oil import growth and the pace of US export growth will slow a bit over the course of the year, but barring a sharp US slowdown that really cuts into imports, a $800b annual trade deficit seems about right.  That implies average monthly trade deficits of around $70b for the rest of the year.

A $800b trade deficit is consistent with a current account deficit somewhat above $900b, depending on the pace of deterioration in the income balance and the scale of transfers.    

My bottom line: reducing the trade deficit is going to be – barring a big fall  in the price of oil – something of a slog.    Import growth has to slow.  And I suspect that global growth won’t be quite as strong as it has been, making it hard to sustain the very strong export growth the US has enjoyed recently.    

A few other tidbits.

• High prices are reducing demand for US oil imports.  Oil import volumes are down 1.6% YTD (Exhibit 17) 
• The US isn’t driving Chinese export growth.    (You know, the RMB hasn’t depreciated v. the dollar).   In July, Chinese export growth was around 25% y/y.   July US imports from China were up a bit under 16%, and YTD, US imports from China are up 16.6%.
• US exports to China are continuing to do well – they are up 36% y/y.  But remember, given that the US imports about five times as much as it exports from China, if imports are up by 16%, US exports need to by growing at 60% just to keep the bilateral deficit from growing. 
• Overall imports from the Pacific Rim are up 11.4% -- faster than nominal GDP growth.  China isn’t just taking market share from others in Asia.  Us imports from non-China Asian economies are up around 7.5% y/y.
• Overall US exports to the Pacific Rim are up 14.4%.   Exports to countries other than China are up by 9.7%.
• US exports to sclerotic old Europe are not so sclerotic.  Overall US exports to Europe are up 13.2% (in $ terms) and exports to the eurozone are up 10.4%.